AP MACRO

Unit 1.3

Demand

A schedule showing the amounts of a good or service that buyers are willing and able to purchase at various prices during a given time period.

Demand schedule

A table showing the quantities of a good consumers are willing and able to buy at different prices.

Law of demand

The principle that, other things equal, as the price of a good rises quantity demanded falls, and as price falls quantity demanded rises.

Diminishing marginal utility

The principle that as consumption of a good increases, the additional satisfaction gained from each additional unit decreases.

Income effect

The change in quantity demanded that results from the change in real income caused by a change in a product’s price.

Substitution effect

The tendency for consumers to replace a more expensive good with a cheaper alternative.

Demand curve

A graph showing the inverse relationship between price and quantity demanded.

Determinants of demand

Factors other than price that shift the demand curve.

Normal good

A good for which demand increases as consumer income increases.

Inferior good

A good for which demand decreases as consumer income increases.

Substitute good

A good that can be used in place of another good.

Complementary good

A good that is used together with another good.

Change in demand

A shift of the entire demand curve caused by a change in factors other than price.

Change in quantity demanded

A movement along the demand curve caused only by a change in the good’s price.

Supply

A schedule showing the amounts of a good or service producers are willing and able to sell at various prices during a given time period.

Supply schedule

A table showing the quantities of a good producers are willing to sell at different prices.

Law of supply

The principle that, other things equal, as the price of a good rises quantity supplied rises, and as price falls quantity supplied falls.

Supply curve

A graph showing the direct relationship between price and quantity supplied.

Determinants of supply

Factors other than price that shift the supply curve.

Change in supply

A shift of the entire supply curve caused by a change in factors other than price.

Change in quantity supplied

A movement along the supply curve caused only by a change in the good’s price.

Equilibrium price

The price at which quantity demanded equals quantity supplied.

Equilibrium quantity

The quantity demanded and supplied at the equilibrium price.

Surplus

A situation in which quantity supplied exceeds quantity demanded.

Shortage

A situation in which quantity demanded exceeds quantity supplied.

Productive efficiency

Producing a good at the lowest possible cost.

Allocative efficiency

Producing the mix of goods and services most desired by society, where marginal benefit equals marginal cost.

Price ceiling

A legally imposed maximum price.

Price floor

A legally imposed minimum price.